If you’ve weighed up a few different methods of asset management, then you’ve probably heard of trusts. In a nutshell, a trust is a tool for handling an individual’s personal investments, money, and non-liquid assets (commercial or non-commercial real estate or land, for example). In this article, we’ll cover how they work, what their most common uses are, and whether you need one or not.
First off, how do trusts work?
To understand trusts, you need to know the three types of people involved with them.
First, you have the “settlor,” or the individual who adds the assets to the trust itself. The settlor writes up a trust deed, which are the general terms for which the trust should operate. In certain circumstances the settlor can even take money out of the trust (known as a settlor-interested trust.)
Secondly you have the “trustee.” A trustee is the individual entrusted to manage that account, and is considered the legal owner of all assets within that trust. This includes paying any taxes that are due when money is taken out of the trust, and how to invest or otherwise grow the assets within that trust. Note that there can be more than one trustee.
Lastly, you have the “beneficiary,” or the individual(s) that will receive the assets within the trust. A beneficiary must adhere to the rules set out by the trust. This could mean that they only receive the income generated from a trust (such as money generated from rental properties), or the capital gained from company shares, or both. Sometimes, entire families are labeled as beneficiaries.
A trust will often be held from the beneficiary for a set period of time. It may also be released to the beneficiary in increments, rather than all at once. The terms for the trust are designed by the settlor during its creation.
Under what conditions would a trust be useful?
Trusts are useful for many reasons. First of all, they’re highly effective at managing and protecting large family holdings and assets. A settlor that wishes to pass down these assets to one or more beneficiaries for instance (but may not be alive to pass the assets down himself) could successfully have his will carried out via the trustee. Also, should the beneficiary be too young or otherwise unable to successfully manage these assets himself, a trust could help keep those assets safe until the proper time or circumstances.
A trust could also take the place of a will, if a will is never written up. So it can be used to determine an inheritance.
Are there different kinds of trusts?
Yes. Many different kinds of trusts exist. For example, a bare trust is a trust where the trustee holds all assets until the beneficiary has reached a certain age and agrees to take them. These trusts are commonly used to ensure that all assets go to their desired recipient once that recipient reaches adulthood.
An interest trust on the other hand is a trust that requires the trustee to release trust income immediately to the beneficiary, as soon as it’s available.
Settlors may also consider a discretionary trust. With discretionary trusts, trustees have greater control over the income that is generated within. For instance, a trustee can decide who among the beneficiaries receive money, or whether or not conditions must be met for a beneficiary to receive it. They may also decide whether a trust pays out income or capital, as well as the frequency that payments go to their beneficiaries.
Then there are accumulation trusts, mixed trusts, and settlor-interested trusts. We already discussed settlor-interested trusts above. Accumulation trusts are built to increase the trust fund by adding any capital into the trust itself (rather than being paid out to a beneficiary). Mixed trusts allow a settlor to mix and match different types of trusts, although all of these trust types still follow their own tax guidelines.
Anything else I need to know about trusts?
We’ve only breached the surface with regards to trusts in this article. And chances are you may actually have a trust and not even know it. A life insurance policy, for example, is made in trust. Same with an investment portfolio.
If you’ve considered setting up a trust for someone, and would like to learn more about the process, then we’d be happy to discuss this with you. The specialists at UAE Money Expert are both friendly and knowledgeable. And best of all, you’ll get our first consultation completely free!
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